The stock of Mercer International (NAS:MERC, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $15.26 per share and the market cap of $1 billion, Mercer International stock appears to be modestly overvalued. GF Value for Mercer International is shown in the chart below.
Because Mercer International is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 6.6% over the past three years and is estimated to grow 3.30% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Mercer International has a cash-to-debt ratio of 0.31, which which ranks in the middle range of the companies in Forest Products industry. The overall financial strength of Mercer International is 4 out of 10, which indicates that the financial strength of Mercer International is poor. This is the debt and cash of Mercer International over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Mercer International has been profitable 6 years over the past 10 years. During the past 12 months, the company had revenues of $1.5 billion and loss of $0.13 a share. Its operating margin of 6.11% in the middle range of the companies in Forest Products industry. Overall, GuruFocus ranks Mercer International's profitability as fair. This is the revenue and net income of Mercer International over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Mercer International is 6.6%, which ranks better than 78% of the companies in Forest Products industry. The 3-year average EBITDA growth is -6.8%, which ranks worse than 68% of the companies in Forest Products industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Mercer International's ROIC is 10.63 while its WACC came in at 7.13. The historical ROIC vs WACC comparison of Mercer International is shown below:
To conclude, the stock of Mercer International (NAS:MERC, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 68% of the companies in Forest Products industry. To learn more about Mercer International stock, you can check out its 30-year Financials here.
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